The Unhappiest Successful Advisors: Accidental Business Owners

As we enter the new year, many advisors will be thinking about ways they can improve their business in 2018. Yet one of the more interesting trends that I have been seeing lately is the rise of advisory firms where the biggest challenge is not the success and growth of the business… but that the advisory firm owners themselves are unhappy, or downright miserable. This seems to particularly occur within the RIA community, and especially amongst those firms managing between approximately $100 million and $300 million of AUM… a subcategory of firms I call “accidental business owners”. Because the source of their stress is that they may have built successful and profitable businesses – and now find themselves responsible for managing it – despite the fact that they never actually intended to build a firm that they would have to spend so much time managing in the first place!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss what is causing so many advisory firms to become accidental business owners, why they occur in the first place, the problem with being an accidental business owner, and what financial advisors can do if they find themselves in this situation to become happier (and regain control of their lives).

To understand the phenomenon of the accidental business owner, it’s important to first point out that the word “business owner” is being used in a very specific way. We often talk about advisory firms as being “businesses”, but there’s a distinction between true “businesses”, and advisory firm practices. The difference is that a practice is built around an individual advisor. The practice is you, and while you may have a staff member or two, it’s primarily about the services you provide to clients. By contrast, an advisory firm business – a true business – goes beyond just you as the founder advisor. There are other advisors, who manage clients, and who are responsible for helping to bring in new revenue. Historically, almost all financial advisors were salespeople, and most salespeople simply have practices – as evidenced by the fact that if the advisor-salesperson did not go out and selling new insurance or investment products, income dropped precipitously and the business would die. But with the rise of the AUM model, and phenomenally high retention rates amongst advisory firms, advisors began being able to accrue clients over time and actually build large and scalable businesses – businesses that truly needed to hire other advisors to come in and manage relationships – often even without trying to do so. The clients just accrued until the point that it was a business. Thus, they became “accidental” business owners.

But the fundamental problem that crops up for those financial advisors who become accidental business owners is that the job of running an advisory business is different than the job of being a successful advisory practice. A successful practice as a financial advisor is all about your ability to effectively service your own clients. By contrast, running a successful advisory business requires you to be in the role of teaching and training other financial advisors to be good at business development, financial planning, servicing clients, and managing relationships (in addition to managing the firm, hiring staff, making technology decisions, and actually being a leader of the firm). Which means if the primary reason you started your firm in the first place was because you like to be a financial advisor, and give people advice, and help them, and have those client relationships… then being an advisory firm business owner is going to be pretty miserable, because you don’t get to do any of that stuff anymore. Which ultimately tends to occur as firms grow to around $100 to $300 million in AUM, because this is the point at which an advisor (or a small team of 2-3 advisors) truly crosses the threshold where they are at capacity and have to add more advisors and other employees and start to scale their practice up to a business.

So with all this being said, if you do find yourself in the position of being one of those unhappy accidental business owners, what should you do about it? The key is to acknowledge that is that there is effectively a fork in the road. The path on the left is to embrace your new role as a business owner. You may not have set out to do it, but here you are, and this is your opportunity to grow, to learn something new, and to do this well. You may recognize that you need help, but that’s OK. If you’re a more visionary type, and you can see what needs to be built, but you’re really not the good manager to build and integrate it all together, then make the reinvestment to hire a Chief Operating Officer to be your right hand for implementation.

On the other hand, the path to the right is to go back to being a successful solo advisory practice again. This is by far the more painful path for most of us. Because it basically means downsizing the firm and the number of clients you serve, which to many can feel like “failure”. Except it turns out that it may be the single fastest step to actually make you happy again in your business. Because, due to the 80/20 rule, many or even most advisors can maintain their current take-home pay by scaling back to (just) their top 20% of clients while freeing up additional expenses and a lot of time and effort.

But the bottom line is that as you get started here in the new year, take a good long look at what you’ve built. Is it a practice, or a business? And more importantly, what do you want it to be. Do you really want to build a business, and make the reinvestments – financial, time, effort, and learning new skills – that it takes to lead the business? Or do you really just want to run a successful practice, make good money, and regain control of your time? Either path is truly okay, but you have to decide what you want to build towards. And if you’ve found yourself accidentally going down the “wrong” path – you’re an accidental business owner that doesn’t really want to be anymore – recognize that going back to a lifestyle practice is an acceptable answer, and it may be the path that truly leads to greater happiness!

Schwab Insights

Yahoo Finance

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